Druckenmiller warns that the stock market is one big ‘mirage’ right now

We are one day closer to seeing if Fed Chairman Jerome Powell tosses this market a life preserver.

If the Fed holds off on a long-expected rate increase, you can thank investing legend Stanley Druckenmiller and 2008-era Fed governor Kevin Warsh, says Macro Tourist blog’s Kevin Muir, in reference to a recent op-ed in The Wall Street Journal in which the two warned the central bank has missed its window for such a move.

“This op-ed is a way bigger deal than most the market participants currently appreciate,” says Muir, who believes the combined power of the two could wield some influence. Warsh — the “biggest legitimate hawk out there” — has “given tons of cover for Powell to err on the dovish side,” he notes.

And while Santa definitely has his work cut out for him if that year-end rally is still coming, Muir thinks a Fed pause will mean a rally for stocks.

But don’t go referring to Druckenmiller as a bull, as our call of the day comes from the man himself who suggests that the equity market is troubled on closer inspection. In an interview with Bloomberg Television Druckenmiller says the Fed is seeing “a bit of a mirage” by just looking at a 13% drop — this quarter — for the S&P 500.

“Because if you look inside the stock market...front-end cyclicals show a completely different picture than the defensive parts to the market. Auto stocks are down 30%, they’re not 10% or 11%, building stocks are down 35%, banks...are down 25%...the Russell is down 20%, retail equities are down over 20%. How in the world can the S&P 500 be down only 10% or 11%?” That’s because utilities, staples and pharmaceuticals—economically defensive stocks — are up, he says.

“The inside of the stock market, which is the best economist I know and which I’ve used every cycle when I’ve invested, is saying there’s something not right there,” said Druckenmiller.

He added that since 2010, corporate nonfinancial debt has increased to $6 trillion from $9.6 trillion and during that time corporate earnings have risen 27%. And the only way to explain a 60% rise in the S&P 500 during this time is “because all that borrowed money went to finance buybacks and M&A,” the Fed pushing investors to take on more risk and POTUS to do more fiscal spending.

Druckenmiller said the U.S. could be looking at a 2007-type situation, though he’s not forecasting a recession like some, or even advocating for a rate cut. He also told Bloomberg that he owns Treasurys, he’s short financial stocks and thinks cloud-computing stocks like Microsoft
MSFT, +1.50%
and Salesforce
CRM, +1.80%
will outperform even if the economy contracts.

But over the next three or five years, returns will be no picnic, says the investor that MoneyWeek once referred to as one of the “world’s greatest investors.”

The chart

Bank of America Merrill Lynch’s monthly fund manager survey is out and there is a new winner in the category of the “most crowded trade”. Congratulations U.S. dollar. Our chart of the day from the B. of A. strategists shows how the “Long FAANG + BAT” (Facebook
FB, +1.17%
Amazon
AMZN, +0.18%
Apple
AAPL, +0.62%
Netflix
NFLX, -3.99%
Google-parent Alphabet
GOOGL, +0.74%
plus Chinese technology giants Baidu
BIDU, +1.93%
Alibaba
BABA, +0.67%
and Tencent
0700, +0.89%
) call has given up the throne after 10 months dominating as the most-crowded position among investors.

Bank of America Merrill Lynch

As the Times points out, more than half of the 3% swings have come since October, and things don’t appear to be quieting as we head toward the holidays.

The economy

The quote

Reuters

Chinese President Xi Jinping

“No one is in a position to dictate to the Chinese people what should or should not be done.” strike down the Affordable Care Act.” — That was China’s President Xi Jinping, perhaps in a trade jab, as he address the Central Economic Work Conference Tuesday. The markets didn’t get what they wanted exactly though, with no big announcements, though there has been chatter about tax cuts aimed at stimulating the economy.

The stat

202 years — That’s how long it will take the pay gap between men and women to finally close, says the World Economic Forum in its annual Global Gender Gap Report. And that’s a tiny improvement on last year’s results.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. Be sure to check the Need to Know item. The emailed version will be sent out at about 7:30 a.m. Eastern.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.